Preparing for Drastic Tobacco Regulations

Not surprisingly, convenience store industry operators identified the future of tobacco as one of their top five concerns heading into 2010. And with good reason. Operators have entered a period of unprecedented challenges when it comes to selling cigarettes, which means they must find new and innovative ways to market and merchandise this essential product category.

In June, President Barack Obama signed into law the Family Smoking Prevention and Tobacco Control Act (FSPTCA), which grants authority to the U.S. Food and Drug Administration (FDA) to regulate tobacco products. Among other things, the FSPTCA provides FDA with regulatory authority to regulate marketing and promotion of tobacco products and to set performance standards for tobacco products to protect the public health.

Among the deadlines set by the FSPTCA: •By January 2010, tobacco manufacturers and importers will submit information to FDA about ingredients and additives in tobacco products. •By April 2010, FDA will reissue the 1996 regulation aimed at reducing young people’s access to tobacco products and curbing the appeal of tobacco to the young. When this becomes effective, a number of measures will take effect: Tobacco manufacturers may no longer sponsor athletic and entertainment events using tobacco product brand names and logos; they may no longer sell or give away clothing or other items that bear the brand name or logo of a tobacco product; and they will no longer be able to distribute free samples of cigarettes, and free samples of smokeless tobacco will be allowed only in adult-only facilities.•By July 2010, tobacco manufacturers may no longer use the terms “light,” “low,” and “mild” on tobacco products without an FDA order in effect. •By July 2010, warning labels for smokeless tobacco products will be revised and strengthened. •By October 2012, warning labels for cigarettes will be revised and strengthened.

Efforts to fight the restrictions have thus far proven fruitless. In November, a federal judge in Richmond, Va., ruled that tobacco companies attempting to block new restrictions on their marketing had “little chance” of success. R.J. Reynolds Tobacco Co. and Lorillard Inc., together with National Tobacco Co., Discount Tobacco City & Lottery Inc., and Kentucky-based Commonwealth Brands (owned by Britain’s Imperial Tobacco Group PLC), had filed the lawsuit in Bowling Green, Ky., objecting to parts of the FSPTCA, which was enacted in June. But in his decision, U.S. District Judge Joseph H. McKinley Jr. found that blocking the provisions was not warranted.

Intrusive Attempts“The government is being very intrusive here,” said Thomas Briant, executive director of the National Association of Tobacco Outlets (NATO). “We have seen just in the past five months the FDA take what I refer to as a very activist role in rolling out their regulations. They have said repeatedly that they want to communicate and work with the industry, however, their actions generally are the opposite: they issue regulations and notices of regulations and guidelines without talking with the industry. They say one thing and do another, and that’s why I say it’s an activist type of agency.”

Most concede that this spate of legislation is only the beginning. Briant views it as government taking small steps toward prohibition. “They first came out with a flavored cigarette ban, but in a letter issued Sept. 14, the FDA said it was ‘going to ban any flavored cigarettes and any other flavored tobacco products if they are packaged like cigarettes, even if they are labeled as cigars.’ So little cigars were up in the air as to whether or not they were banned,” he said.

Tobacco companies are understandably proceeding on the notion that they are not included and, thus far, the FDA has not pressed the issue. “But you can see the attitude being taken by the agency: they are overreaching right away. They issued that letter without speaking to anyone in the industry, as far as we know, causing a great amount of confusion,” Briant said. “So yes, what we are seeing is progressive prohibition: they’re going to take it one step at a time.”

Warning SignsAs the FDA moves forward Briant fears there will be a greater jolt ahead for operators as the administration’s mandated graphic warning labels go into effect. As a result of the recently passed legislation, such warnings will cover the top half, front and back, of each package of cigarettes.

“On all retailers’ back boards, where there are racks of cigarettes being displayed, all the customers may see are the graphic warning labels, not the names of the products, not the logos—nothing else but the graphic warning labels,” Briant said.

Currently the subject of a lawsuit by the tobacco companies, the change is slated to go into effect on Sept. 22, 2010, 15 months after the date of enactment. It would require nine randomly displayed, rotating warnings. The word WARNING will appear in capital letters, and all text must be “conspicuous and legible” 17-point type.

Color photos also will accompany the warnings under the cellophane, although the FDA has yet to select specific ones. They are mandated to be in place no later than June 22, 2011, which is two years after an enactment. “The photos will depict the negative health consequences of smoking,” Briant said. “So it’s kind of a two-step process, and that is going to mean the repackaging of every cigarette package out there.”

In the end, the graphics will be “what consumers are going to see when they look at the display racks,” Briant warned. “They are not going to be able to tell what brand it is because that will be relegated to the lower 50%.”

That said, depending on the merchandising, cigarette brand names will likely be impossible to read. “Customers may not even be able to say ‘I want this brand or that brand’ because they won’t even be able to see what the brand is,” Briant added. At this point, the legislation, however, does not refer to cartons.

Also ahead in 2010 is a ban on color advertising for cigarettes, which Briant pointed out will also have a major impact on retailers depending, of course, on the outcome of litigation. The ban on color advertising in stores as well as newspapers and magazines is scheduled to take effect in June 2010. Retailers will only be allowed to show black text on a white background.

“Instead of a poster that has color with a brand name together with a picture, all you can have now is one of these white boards with black slate letters that say, for example, Marlboro $3.99 a pack, Camel, $3.99 a pack. That’s all the advertising you can have in your store,” Briant said. “No more point-of-sale color advertising, no more posters, no more flyers, no more brochures—no more anything.”

Even the signs on top of the display racks are prohibited from using color. “They call it tombstone advertising because it’s almost like a graveyard type situation,” Briant concluded. “This goes for ads for cigarettes and smokeless tobacco products. That’s going to be a huge change for in-store advertising, especially.”

Retailers Face Communication ChallengesGiven the FDA’s objections to tobacco firms’ sponsorships of sports events and other marketing efforts, retailers will need to be creative in communicating with adult consumers, but careful not to cross the regulatory line.

“Tobacco is a big part of our marketing plan because it still brings in a lot of foot traffic stores,” said Robert Perkins, direct of marketing for 55 Rutter’s Farm Stores in York, Pa. “We want to look at different avenues and new ventures to communicate our marketing plan.”

Perkins believes strongly that pricing is not guesswork with consumers. “They know that they are going to find the lowest price allowed in Pennsylvania in our locations,” he said. “What we will do is make sure that consumers know that we have not swayed from that over the last five years.”

In Pennsylvania, Perkins saw a statewide $1.60-per-pack tax on little cigars go into effect on Nov. 1. His remains the only state that does not have an OTP tax aside from little cigars. “As states continue to try and figure out budgets and their income stream, tobacco is still going to be compressed, and probably get their fair share of that burden,” he said.

Retailers that are not adept at communicating brand or price selections are going to have a lot more obstacles to clear. “Units are going to continue to be compressed on tobacco, but one of the promising segments remains OTP, where we have seen some strong growth as some of the consumers shift away from cigarettes,” Perkins said. “I think the question mark really is on alternative tobacco products. At this point, I don’t have a good grasp on what effect the FDA will have on any of those.”

From a merchandising standpoint, Perkins said the big tobacco companies are working on a plan to help retailers continue selling tobacco legally. What the tobacco companies come up with will determine much of the cigarette category’s future in c-stores. Rutter’s, like its competition, has already seen a shift in purchasing due to price. “Generics have gotten some lift behind them,” Perkins said. “Their share has picked up, and I think it has been driven solely by pricing.”

Companies that were hurt by the tax on little cigars, have got to be able to manage it more carefully. “We all need to figure out what the next steps are going to be and continue to look for other opportunities,” Perkins said. “Tobacco is going to continue to see sales declines overall due to compressed sales from the cigarettes, but there is a good chance that OTP, cigars, moist and even alternative tobacco products are going to see continued growth.”

Cigarettes Still ViableFor those who suggest that cigarette sales will never regain past heights due to the government’s legislative assault, Perkins disagreed. “You hate to accept anything like that,” he said. “I have been in this industry long enough, and 20 years ago they were saying the same thing. So it’s still a viable category.”

The year ahead promises to be a rough road to travel. “It’s going to have ups and downs,” said NATO’s Briant. “We’re going to see an agency overreach with the regulations, and there will a lot of additional litigation.”

There are already three lawsuits against the FDA because of their proposed regulations filed by retailers and suppliers, Briant noted. “I envision that there will probably be more as the FDA becomes very aggressive in their regulations,” he said. “It’s going to take litigation to get this right and to interpret the law as Congress intended, as opposed to what the agency wants to do.”

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